How to decide if a long-term car loan is right for you

By: Lindsey Boycott on October 28, 2015
Article image

Buying a car has never been easier than it is now. Cars are better-built, offer more options and are equipped with enough cutting-edge technology to tempt even the most miserly buyer.

Combine that with all the leasing and financing choices, and it’s amazing that everyone isn’t driving around in a fully-loaded BMW X5 at $80,000 a pop. One of the newer financing initiatives out there is the long-term car loan.

Terms of up to 96 months on new vehicles make almost any car seem affordable – at least from the standpoint of your monthly payment. With the average marriage lasting about eight years, your auto loan may end up outliving your true love.

The pros of a long-term car loan

According to a 2013 study done by the Power Information Network, over 60 per cent of new car loans extend to seventy-two months and beyond. The good news is that longer terms mean more affordable monthly payments for people who want a good vehicle that will see them through the years

Because vehicles are being built to last, most have expected lifetimes that stretch beyond their loan terms. The perks available on your average car – like hands-free technology, satellite radio, and other innovative options – are making the choice to spend easier for consumers.

In addition, financing offered by the dealer is usually offered at deeply discounted interest rates since they don’t need to make their money that way. So really, you might save an extra $75 a month and only spend $500 or $600 more in interest if you choose a 72-month term over a 60-month term. A long-term car loan might be the way to go if you are in for the long haul.

The cons of a long-term car loan

While there are definite advantages to a longer car loan, there are some downsides to consider. The biggest disadvantage is the way your car depreciates over the term of your loan. Each make and model has its own downward trend, but the fact is that it will happen.

Cars are a depreciating asset; this means you will lose money on it as time goes by. Buying a new car can be a good decision, but it depends on your plans. If you’re not sure that you’ll be keen to keep your car around for more than three years, a long-term car loan may not be for you.

The risk that you’ll be “upside down” and owe more on the vehicle than what it’s worth is almost a guarantee at some point during the life of the loan. If you have to change your plans due to a job loss or a decision to go back to school, offloading a car with a longer loan may be a problem.

The key to success with these kinds of financial decisions is planning. Make sure you the loan term fits into your life plan and that you have an emergency fund to deal with unexpected expenses.